Economic health-check

Posted on Thursday 26 August 2010 byUlster Business

A new world

Neil Gibson, director of Oxford Economics, believes difficult questions about Northern Ireland’s economy still need to be asked
The Northern Ireland economy is facing a new, and some might say more challenging, future. The era of excess spending, both by consumers and by the public sector is at an end with pay freezes, cuts and even redundancies dominating the headlines in economic columns at present.
The prospect of a fall back into recession for Northern Ireland cannot be ruled out and the labour market may take a decade or more to recover depending on how severe the public sector job cuts become. Oxford Economics’ base case has jobs recovering by 2016, but a lower scenario in which the private sector struggles to gain traction sees this extend to 2022.
In this climate it is hard to see the positives, yet many of the region’s major exporters have performed strongly and the number of firms to close during the recession has been small, suggesting a real desire for firms to remain in the region if possible.
It has often been said that Northern Ireland is too public sector orientated, that the high wages paid and sheer volume of jobs was crowding out private sector activity.
Perhaps the period of contraction in public services will help to reduce the pay differentials and encourage growth in the private sector. This process might be accelerated if the public sector looks increasingly towards a private sector-led delivery of services - though it remains to be seen if there is sufficient political appetite for such a transformation. Is there a possibility to sell off activities like government statistics production, public transport, elements of business support? There are of course pros and cons – but surely the severity of the situation requires that these questions need to be asked?
In the depth of recession the prospects look bleak in almost every sector and the question everyone asks is where will new jobs come from? This is a hard question to answer but there are opportunities in a wide range of sectors, including professional services, advanced manufacturing, care for the elderly, tourism and green technologies to name but a few.
Many firms who previously relied on the public sector, particularly the professional services arena, will need to look further afield and with a competitive cost base, relatively skilled labour, low turnover rates and a relatively strong telecoms infrastructure there are reasons to believe many of these firms will be successful.
As is often the case when looking back over economic history, necessity may prove the mother of invention and, painful as it seems, Northern Ireland may emerge leaner, stronger and more efficient when this recession lies behind us.
In times of limited funds governments are necessarily constrained in their ability to prevent the impact of global and national pressures being felt. However there is clearly scope to both reduce waste and use the tax system more effectively that can make a contribution toward debt reduction. Using the tax system to encourage desired behaviour and closing tax loopholes is one way of increasing income (even if not all of the receipts would accrue to the Executive).
For example:
• Red diesel - Could the illegal use of red diesel not be removed by abolishing it and allowing farmers to instead receive a tax rebate based on the size of their holdings?
• Commercial rates system - Could the rates system not be used to encourage landlords to maintain buildings to certain environmental and physical standards to ensure our towns and villages do not fall into disrepair and to support the ailing construction sector?
• Domestic rates - Given the abundance of opulent properties that have sprung up all over the countryside in recent years is there any reason to cap domestic rates as they are currently?
• Revisiting ‘giveaways’ - Should recent giveaways be re-assessed, such as prescription charges, travel passes, rate freezes and water charges?
In themselves none of these will ‘square the circle’. The region is looking at real price spending cuts of well over £1bn over the next four years. But as the saying goes – every little helps.